The Heritage Foundation

Executive Memorandum #417 on Federal Budget

June 16, 1995

June 16, 1995 | Executive Memorandum on Federal Budget

Why Budget Debate Must Not Sideline Agricultural Reform

Conferees are working now to resolve differences between the House and Senate versions of the FY 1996 budget resolution (H.Con.Res. 67). One area they need to address more boldly is agriculture. Decisions made during the budget process about funding for U.S. agriculture programs will have an impact far beyond budget deficit considerations. It may be politically expedient to make only minor modifications in farm programs, but this would be harmful to farmers in the long run. Congress must not allow the budget process to thwart the bold reforms needed to enhance U.S. competitiveness, increase farm income, and revitalize the rural economy. More specifically, Congress should not make agricultural policy decisions in budget reconciliation that preclude pursuing real reform in the 1995 farm bill.

While the need for serious deficit reduction should spur agricultural reform, Congress resists change. Senate Budget Committee Chairman Pete Domenici (R-NM) initially sought farm program reductions of $35 billion-$50 billion over the next five years. However, after intense lobbying by opponents of reform, the final Senate budget resolution reduced the planned savings to only $28 billion. In addition, a non-binding resolution limits savings from commodity programs to no more than 20 percent of the total, so Congress must find $22.5 billion in savings from nutrition programs. In the House budget resolution, nutrition programs must absorb more than two-thirds of the reductions -- $21 billion -- and commodity programs less than one-third. Senate Agriculture Committee Chairman Richard Lugar (R-IN) has suggested that $15 billion in savings could be found in the commodity and export programs, which would be an even split with nutrition programs.

Being required to find significant savings in commodity programs might force Congress to adopt real reform. However, if the budget conferees settle on a lower level of savings, perhaps only $9 billion or less, they are likely to wind up merely tinkering with existing ineffective programs, and the opportunity for real reform will be lost. Opponents could thwart real reform, particularly in the House, by incorporating the farm bill into budget reconciliation and bringing it to the floor with rules that prevent either amendments or votes on specific programs. This would prevent the rest of Congress, particularly advocates of fundamental reform, from voting for elimination of the sugar, peanut, and supply control programs, for example, or a much-needed phaseout of the commodity subsidies upon which supply controls are built.

Opponents of fundamental reform claim they are protecting the interests of America's farmers. But central planning has worked no better in agriculture than it has anywhere else it has ever been tried. It holds back farmers and makes them work to satisfy bureaucrats, not consumers. Nor do farm programs protect small family farmers: payments go overwhelmingly to the wealthiest farmers.

The most absurd argument put forward by opponents is that structural reform actually would result in budgetary costs to the government. This contention rests on two fallacies:

Budget Fallacy #1
Eliminating acreage reduction programs would cost the government money.

Eliminating acreage reduction programs would cost the government money only if the additional acres planted were eligible to receive the current level of deficiency payments and there were only modest reductions in the subsidy level per acre.

Proposals such as those advanced by The Heritage Foundation, however, would eliminate acreage reduction programs and phase out deficiency payments. Rather than receive payments for crops planted on this additional acreage, farmers would be free to plant whatever it made sense to produce for the market. This proposal would save the taxpayer billions of dollars, allow farmers to produce what they want on these additional acres, increase farm income, and stimulate the rural economy. Under any credible analysis, eliminating acreage reduction programs increases farm income. The new export opportunities made possible under the General Agreement on Tariffs and Trade, among other factors, allow output to increase substantially with only a short-term weakening of prices. The result: revenue per farm increases.

The static economic analyses preferred by defenders of the status quo erroneously assume that relatively modest increases in production result in extreme reductions in the market price, inevitably concluding that eliminating acreage reduction increases government costs. But this ignores recent bumper crops that did not result in lower prices, as well as evidence that there will be a rapid growth in the future global demand for food.

Budget Fallacy #2
Some programs, such as sugar, are important revenue producers.

By imposing duties on strictly limited imports of sugar, the federal government did indeed raise about $3 million in the last fiscal year. Proponents of the sugar program also point to government receipts for assessments on domestic sugar production. These amounted to only $24 million in FY 1994, while the extra costs to consumers was $1.4 billion. This is a heavy economic price to pay for a program that gives a small cartel of sugar processors and landlords the power to parcel out the right to grow sugar.

For Congress to buy these fallacious arguments would be to allow the special interests to stop reforms that would help America's farmers and rural communities. Congress has a rare opportunity this year to demonstrate to American farmers, consumers, and taxpayers that it truly is working in their best interests. Current commodity programs not only are expensive for taxpayers, but also hold down farm income. Moving toward a free market would permit farmers to produce for the consumer rather than for the government.

A free market reform of agricultural policy would:

  • Eliminate all authority for acreage reduction and set-aside programs;
  • Eliminate the sugar and peanut programs;
  • Phase out deficiency payments for wheat, feed grains, cotton, and rice and phase out the dairy program; and
  • Phase out the Conservation Reserve Program.

The 1995 farm bill is an historic opportunity to develop market-oriented reforms of agricultural policy. The budget reconciliation process should not be used to block such reform. If Congress allows this to happen, the U.S. share of world agriculture markets will continue to shrink, eroding farm income and hurting rural communities. But if the 1995 farm bill eliminates government subsidies and controls, America's farmers will be able to outproduce and outsell the rest of the world, with their expanded output generating a tremendous growth in farm income. This freedom to produce will also mean a large boost to the rural economy as supply and distribution industries retool and reinvest to meet the new demands of a larger farm economy. In fact, according to Heritage estimates, rural America would get a $35 billion shot in the arm, which would include an increase in farm income of more than $14 billion over the next five years. Many communities that are dying under today's command-and-control programs would spring back to life.1


  1. For a full discussion of agricultural reform proposals, see John E. Frydenlund, Freeing America's Farmers: The Heritage Plan for Rural Prosperity (Washington, D.C.: The Heritage Foundation, 1995).

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